By Susanne Walker March 18 (Bloomberg) -- The difference between the yield on Treasury 2-year notes and 30-year bonds fell to the narrowest level in more than two months as a government report showed consumer prices were unchanged in February. “People are more comfortable being in trade flatteners,” said Tom Roth, senior Treasury trader in New York at Mitsubishi UFJ Financial Group Inc. “The Fed is still willing to err on the side of keeping rates low.” The 30-year bond yield dropped 1 basis point, or 0.01 percentage point, to 4.56 percent at 9:16 a.m. in New York. It touched 4.54 percent, the lowest level since March 4. The yield on the 10-year note was little changed at 3.64 percent. The spread between the 2- and 30-year securities, charted on the yield curve, dropped to 3.64 percentage points, the lowest level since Jan. 5. “Steepeners have been in place for a long time and made a lot of money for a lot of people,” Andrew Roberts, head of European rates strategy at Royal Bank of Scotland Group Plc in London, said before the inflation report, referring to bets that longer-dated yields will rise relative to shorter-dated yields. “Turning those bets into flatteners is like turning an oil tanker. It will take a long time.” The premium investors demand to hold seven-year notes over two-year debt will fall to below 200 basis points in the next three months, Roberts said. Before the inflation report, the yield spread was at 217 basis points today, down from a seven-month high of 237 basis points on Jan. 11. Fed Rate View Futures on the CME Group Inc. exchange showed a 38 percent chance policy makers will increase the fed funds target by at least a quarter-percentage point by the September meeting, compared with 49 percent odds a month ago. The Fed said on March 16 that the target lending rate will stay low for an “extended period.” The consumer price index didn’t increase for the first time since a decrease in March 2009, the Labor Department reported today. The median forecast of 79 economists in a Bloomberg News survey was for a 0.1 percent increase. The spread between the yield on 10-year inflation-indexed securities and nominal Treasuries of the same maturity, was 2.23 percentage points, down 2 basis points from yesterday. That so- called breakeven rate represents traders’ expectations for the rate of inflation over the life of the debt. Drop in Yield The 10-year yield has decreased 21 basis points this year as indications the economic recovery is struggling to gain traction boosted speculation the Fed will keep the target rate in the range of zero to 0.25 percent. The U.S. will sell $44 billion of two-year notes on March 23, $42 billion in five-year debt the following day and $32 billion of seven-year securities on March 25, according to the average forecast in a Bloomberg News survey of seven primary dealers. An announcement is due at 11 a.m. Washington time. To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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